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GAS WITHOUT POLITICAL IMPURITIES

The energy policy of Azerbaijan has passed another test of time

Author:

15.03.2016

The theme of gas has become pivotal at the regional level in late February - early March. It gained in topicality due to several events including the second meeting of the Southern Gas Corridor (SGC) Advisory Council, the conclusion of talks on the supply of Azerbaijani gas to Georgia and the announcement by Gazprom of a new concept for gas delivery to southern Europe.

The second meeting of the SGC Advisory Council, held in Baku, has once again confirmed the priority of this route for Europe. No wonder that EU High Representative for Foreign Affairs and Security Policy Federica Mogherini timed her first visit to Azerbaijan to coincide with this meeting.

"I have come here with a well-defined mandate: we strongly support the Southern Gas Corridor, and we are determined - and me personally - to do our part to ensure that it is completed on time," Mogherini said.

Although several sources of gas have been suggested in recent years to diversify energy supply to Europe, including possible deliveries of Iranian and Iraqi gas as well as shale gas from the United States, Azerbaijani natural gas still remains the most realistic option. This is why the Southern Gas Corridor project is redrawing the energy map of Europe, as mentioned by Azerbaijani President Ilham Aliyev. "Azerbaijan will get access to larger markets regulated by rules, practices and legislation. European consumers will receive gas from a reliable, friendly source, a new source. This source can provide reliable supplies for decades to come," said the head of the Azerbaijani state at the Advisory Council meeting.

In this context, of special interest are the words of European Commission Vice President for Energy Union Maros Sefcovic: "We refer to the SGC as a graphic example of how Europe diversifies its energy sources. This means a new supplier located at the new address, a new route and new gas. It really brings new elements to the energy security of Europe".

By the way, it is quite remarkable that representatives of financial institutions took part in the Advisory Council meeting. Serious interest in financing the construction of the Trans-Anatolian (TANAP) and Trans-Adriatic (TAP) pipelines, which are part of the SGC, was shown by the European Bank for Reconstruction and Development, the European Investment Bank, the International Finance Corporation and others.

Given that a large share in the TANAP project belongs to SOCAR [State Oil Company of Azerbaijan Republic], the issue of financing its construction is less acute, and therefore work on the route is in full swing to ensure the delivery of gas to Turkey as early as 2018.

There should be no special problems with the implementation of the TAP project, either. The European Commission has approved an agreement between the TAP consortium and the Greek Government to grant tax concessions, which opens up opportunities for starting the pipeline construction. According to TAP Managing Director Ian Bradshaw, the construction of the pipeline will commence in the summer of 2016 and all financial issues are expected to be resolved by that time.

The interest of oil and gas companies in financing the SGC project during the period of lower energy prices and the declining trend in capital expenditures show the importance of this route for the major players. Maros Sefcovic believes that, in such circumstances, there is a need to speed up work on the project, as any delay can lead to unnecessary costs. Accordingly, he called to quickly resolve the issue regarding the concerns of local authorities and the community of the Puglia region in the southern part of Italy. "The TAP consortium is ready to demonstrate that the project will not bring any harm to the environment or the tourism industry. On the contrary, the project is going to provide new jobs and business opportunities for the region. We hope that this issue will be resolved without affecting the schedule and the original concept of this project," Sefcovic said.

It is also noteworthy that a few days before the SGC Advisory Council meeting, the Russian gas monopoly Gazprom also announced a new route of gas supplies to Europe. On 24 February, Gazprom, Edison of Italy and DEPA of Greece signed a memorandum on gas supplies from Russia to the EU via the Black Sea. To this end, the parties intend to use the results of the work conducted by Edison and DEPA within the ITGI Poseidon project.

At the time, this project was considered as a segment of the Southern Gas Corridor to supply Azeri gas, but the choice was ultimately made in favour of the TAP project. Initially the project provided for access to Greece via the Turkish territory and then to Italy through the Ionian Sea.

In this case, Gazprom intends to use the sea part of the project to get into Greece via Bulgaria or Romania and take advantage of the South Stream infrastructure already laid to the Black Sea coast of Russia.

However, here the question rests not only on Gazprom's desire and financial capabilities, but also on the EU's support. Earlier, it was the position of the European Commission that put an end to the South Stream, which provided for the delivery of Russian gas to the EU via Bulgaria.

The same position in respect of the new Russian project cannot be ruled out. At least, European Commission Vice President Maros Sefcovic said that the EU would have to evaluate the efficiency and feasibility of the new project.

According to him, if the project would require the construction of large infrastructure facilities, it should be recalled that the existing infrastructure is only used at 50 per cent of its capacity. "Taking this into consideration, the effectiveness of the project is already in doubt," he said.

Against this background, the EU remains committed to the option of supplying Russian gas in transit through Ukraine, bypassing which is the purpose of new Russian gas pipeline projects. "We think that Ukraine over the last two years, despite the geopolitical tensions on its eastern border, has proven to be a reliable transit country, and therefore we want to see that the transit of gas through Ukraine will continue in the future," Sefcovic said.

A more assertive position was expressed by the US State Department's Special Envoy for International Energy Affairs Amos Hochstein, who noted that the ITGI Poseidon project does not meet the policy of diversifying gas supply sources. "The only way to resolve the EU energy security is through diversification. More projects that simply bring the same gas from the same fields to the same consumers, although through a new pipe, will not contribute to energy security," he said.

"South Stream, Turk Stream, Nord Stream, all the other streams are simply restatements of political projects that have questionable economic value, especially in these market conditions," Hochstein said, adding that, in the context of investment reduction in the oil and gas sector, it is far better for EU consumers to focus on funding new routes for gas, such as the Southern Gas Corridor, rather than discussing projects that simply bring the same gas.

The EU's special interest in the SGC is generated by the possibility of not only delivering Azeri gas to Europe, but also opening the way to Europe to Turkmen, Iranian, Iraqi and even Israeli gas the reserves of which were discovered off the coast of Israel. 

The EU is primarily focused on involving Turkmenistan in the SGC project. In his interview to Trend News Agency, Sefcovic said that the talks on Turkmen gas delivery to Europe were progressing quite well. "The latest meeting of the working group was held in Istanbul, at which two options for gas supplies from Turkmenistan to Europe were considered. Now this possibility will have to be assessed by all the governments, and we hope that we will come back to this discussion very soon," he said. Sefcovic further noted that new developments in Iraq, Iran and East Mediterranean also created opportunities to receive gas from new potential suppliers. "In the end, everything will depend on what the overall demand for gas in Europe will be, which we projected for 2030 to be more or less the same as it is today, that is from 380bn cu m to 450bn cu m per annum. And, of course, we need to understand which route of supplying this gas to Europe will be most cost-effective, how we can use the Southern Gas Corridor for this purpose or should we use alternatives such as LNG," Sefcovic said.

By the way, the SGC Advisory Council meeting put an end to the issue of providing Georgia with gas. Georgian Deputy Prime Minister Kakha Kaladze, who participated in the meeting, announced the completion of negotiations on increasing the supply of Azerbaijani gas and revising its price. The actual signing of agreements took place already in Tbilisi during the visit of SOCAR President Rovnaq Abdullayev.

Under the new agreement, Azerbaijan will additionally supply about 500m cu m of gas per year to the neighbouring country, bringing the total volume of gas exports to Georgia to 3bn cu m. According to Abdullayev, this will fully provide Georgia with gas until at least 2030. The gas supply contract employs a special formula for determining the price based on the cost of fuel in the world markets, with an automatic review every six months. In Abdullayev's view, the formula corresponds to international experience. "There was a time when world gas prices were higher than those at which we provided gas to Georgia. Now prices have fallen considerably, so it is normal that the Georgian side insisted on the revision. We decided to use the international experience and derive a specific formula," Abdullayev told ANS TV channel.

It is noteworthy that the Azerbaijani side has found an opportunity and available pipeline capacity to increase gas supplies to Georgia, though just a couple of months ago Kakha Kaladze insisted on the need to purchase Russian or Iranian gas because of the limited possibilities of Azerbaijan. Furthermore, Kaladze said that Gazprom resolutely insisted on paying in cash for the cost of gas transit to Armenia, whereas before that Georgia received 10 per cent of the gas volume being transited. It was by the loss of this gas volume, which was in the range of 300m cu m, as well as an increase in consumption, that the Georgian government justified the need for purchasing Russian gas. But after signing the agreement with SOCAR, Kaladze said the government no longer considers the option of procuring Iranian gas due to its high cost. Within a short time, Georgia managed to sign with Gazprom a gas transit agreement on the same terms, providing for the allotment of 10 per cent of the gas volume supplied to Armenia.

Earlier R+ reported that Azerbaijan supplies gas to Georgia under the most favourable conditions, which make both Russian and Iranian gas uncompetitive. The outcome of the negotiations conducted by Georgia with Azerbaijani, Russian and Iranian suppliers has once again confirmed it.

In principle, Tbilisi's desire to reduce the gas price is quite understandable and natural. And the use of a formula for determining the cost of gas is the best way out in the current circumstances of falling oil prices. However, to what extent will Georgia remain committed to this formula when oil prices go up, affecting the cost of gas?

In any event, Azerbaijan reaffirmed its reliability as a partner in its relations with Georgia. The same approach is given priority when delivering gas to Turkey. There is no doubt that, in supplying gas to Europe, Baku will only be guided by cost-effectiveness, too. "Energy factor should never be part of any kind of a political initiative or political demand. We need to separate energy cooperation from political format and only in this case we can achieve success," said President Ilham Aliyev at the SGC meeting, noting that Azerbaijan remains committed to its energy policy which "encourages free competition, market economy, cooperation, and not confrontation in the energy sector".

This position of Azerbaijan resonates among European partners. "The Southern Gas Corridor is more than energy diversification and EU energy security for us. It is also about enlarging and deepening political, economic and social ties with a number of partners in a wider region that can contribute to its implementation," Federica Mogherini said in Baku.



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